Power IPOs: Stretching it too far - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Power IPOs: Stretching it too far

Dec 7, 2009

India needs a lot of power over the next few years. There are no two ways about it. That the country can face a tough future if nothing is done on the power front is a widely known fact. Something needs to be done urgently if we are to maintain our high GDP growth numbers over the next many years.

While the government and private sector realise this fact, things are still very slow on ground. This is justified by the fact that we still add less than 5,000 megawatts (MW) of new capacity every year. As compared to this, China adds around ten times this capacity annually!

Now while India continues to suffer a grave power deficit, we are seeing a spate of new players entering the fray. And the way they are doing this is by way of raising fresh capital from the stock markets. We have seen three large power sector IPOs since the start of this year. These have been from Adani Power (July), NHPC (August) and Indiabulls Power (October). Another company - JSW Energy - is launching its IPO today.

While there are several differences in the businesses of these companies, one thing remains common. High valuations at which their IPOs have been priced. This is when some of these like Adani Power and Indiabulls Power had no prior history of operating large power plants and therefore suffered from huge execution risks. While it is not to say that existing power players coming with their IPOs do not face such risks, but experience plays a big part in the success of a power venture.

Coming back to these new kids on the block, they face a number of issues in developing their power projects. Such issues range from regulatory and environmental approvals, land acquisitions, and fuel and equipment supplies. All these may result in cost overruns of projects thereby impacting future cash flows, in anticipation of which these IPOs have been priced high in the first place!

There is no denying that some of these companies might earn big bucks in the future as their projects come on stream. But would this mean big bucks for investors is highly doubtful. This is because these companies will require lots of capital over the next few years that will most likely stretch their balance sheets.

As such, a lot of money that will be generated through these power projects will ultimately go back to fund expansion of these projects. A little will come back to the investors either in terms of high return on equity or in terms of dividends.

Anyways, those who have applied to these power sector IPOs have already started on a weak base. This is given that they have picked up these stocks at high valuations, which is not the right way to go about investing in stocks.

Equitymaster requests your view! Post a comment on "Power IPOs: Stretching it too far". Click here!

  

More Views on News

How Did Mindtree Perform in Q4FY21? (Company Info)

Apr 20, 2021

Here's the rundown on the company's latest quarterly results.

Tata Dividend Yield Fund: Seizes Opportunities from High Dividend Yield Stocks (Outside View)

May 7, 2021

PersonalFN analyses the features of Tata Dividend Yield Fund and explains the potential this fund has to offer to its investors.

My Secret to Find Breakthrough Stocks (Fast Profits Daily)

May 7, 2021

I've used this trading technique for many years with great success. I'm sharing it with you today.

The Key to Profit from India's EV Revolution (Profit Hunter)

May 7, 2021

Stocks you must consider investing in before buying your first electric vehicle.

Axis Healthcare ETF: Seeking Capital Appreciation from Sectoral Exposure (Outside View)

May 6, 2021

PersonalFN analyses the features of Axis Healthcare ETF and explains the potential this fund has to offer to its investors.

More Views on News

Most Popular

Offer for Sale (OFS): What Does It Mean?

Here's a quick guide to OFS in the stock market.

Time to Buy Smallcaps? (Fast Profits Daily)

Apr 30, 2021

In this video, I'll show you why I favour smallcaps over the Nifty.

The Next Smallcap Winners (Profit Hunter)

Apr 30, 2021

Price is the only due diligence one might require to buy this business.

Sell in May and Go Away? (Fast Profits Daily)

Apr 28, 2021

Does the concept of selling stocks in the month of May, work in the Indian market?

This Fund Manager Has Taken the World by Storm. Will You Invest With Her? (Profit Hunter)

Apr 26, 2021

Should you invest with this Rockstar fund manager who has outperformed in a big way?

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


May 7, 2021 (Close)

S&P BSE SENSEX 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS